Economic Factors That Highly Affect Business

In the world of business, there are multiple factors which can lead it down different avenues. But, there is an equal number of factors which have their impact on business.

To be precise, there are quite a number of internal and external factors which can make or break your business. Although you can control internal factors, you cannot do the same with external ones. So, this is when business owners need to stand strong against storms and surpass their subsequent consequences.

Discussed below are some common factors which all have a considerable effect on your company:

Inflation:

Inflation is one incident which happens when there is excess supply of money in the economy. This surplus flow money is not supported by the product of goods and services. An obvious outcome of excess money in the economy is that prices of goods increases with an aim to sustain business. This effectively results in increase in price of raw materials used for production of goods. This ultimately raises price of the overall product.

In other words, income remains constant bit the prices of products and services increases which results in reduced buying potential. This gradually decreases demand for goods in the market.

Economic Growth and Development:

Economic growth defines amount of finance society is earning at large. Economic development defines volume of money being invested for long-term into different channels.

Amongst all the economic factors which affect businesses, economic development is the most important one. The most obvious reason is because business has to meet demands of economically active society. The best example could be at times brands doing well for a particular period, even better than the companies that produce fundamental offerings.

Demand and Supply:

Demand and supply are two basic pillars which affects any business structure. Demand can be coined as the ability to a purchase a commodity by a consumer while supply is the ability of business to meet demands of consumers.

For example, the latest Smartphone model will have higher price because there is demand in the market. The price of the model will increase if the supply does not suffice demand. On the contrary, the price might reduce if the supply meets estimated demand.

Yet another example is, Brazil is the largest producer of sugar in the world. Around the 2000’s improper weather resulted in disruption of majority of crops and it resulted in short supply. The overall outcome being high prices of sugar due to major imbalance between demand and supply. Eventually, the market forces ensured that the demand and supply becomes equivalent.

Money and Banking:

Finance, economy and business are part of vicious cycle wherein one has effect on the other. This is why, if there is a hurdle in financial cash flow in business then the economy is likely to face the blow either directly or directly.

For instance, if the economy is going through rough phase, banks as well will change fiscal and monetary policies and this eventually impacts your business. Because customers lose their purchase power and suddenly demand in market reduces.

Even under usual circumstances, small businesses have limited resources in hand which makes it difficult for them to keep business going. Irregular cash flow finance can be a major road block in your way to move out of a situation but additional outside financial help can help you overcome this circumstances.

Marginal and total utility:

In simple words, utility is satisfaction derived from the consumption of goods by consumers. It has been observed that continuous consumption of a particular good or service results in reduced satisfaction. This affects sales figure sooner or later.

This is why organisations invest in a new brand or sub-brand to rely on during such situations as they help boost sales. Launch of a new brand is a way to sustain existing position and reputation in the market. You can say that diminishing utility is an external factor affecting your business.

The best example for this is when you buy a new game or dress, you are really excited to play it or wear it but over a period of time this excitement diminishes. The marginal utility is when you play game or wear the dress the second or third time. But, the next time you play or wear the dress the utility start to diminish. And, this keeps on reducing each time you use the product after this point.

General Price Level:

Economy plays a crucial role in the world of business and its growth as well because it helps to set general price levels of commodities. Price of raw materials, paying potential of consumers, cost of production and transportation cost are few essential that influence general pricing levels and lower profit margin of business.

An increase in one of the components raises the overall cost of the product and effects sales. For example, there is rise of £10 in price of pizzas then people may not order them as frequently as they previously used to. They might also reduce the number of pizzas they usually order (6 instead of 12).

All in all, change in economy has an effect on the functioning of a business. If an organisation plans their strategy considering external uncontrollable conditions, then they will have to face minimum changes while implementing them. It is wise to take calculated risks and to ensure that the business runs smoothly. This may lead you to business expansion when demand is high and at lower rate of interest.